May 16, 2012
Advance Auto Parts, Inc. (AAP) is a specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. It provides products for many different vehicles including cars and vans as well as the do-it-yourself (DIY) service.
Corporate Strategy
Advance Auto Parts acquired Auto Parts International to fuel its growth over the coming years. It has also overhauled its management system to make it more efficient and well structures. The company is trying to reduce its expenses in the supply chain and its own management, and is tackling this using a variety of cost-cutting techniques such as higher productivity per worker, allowing the company to employ fewer people. It is also expanding slowly through opening new stores, which is an encouraging sign.
Macro Trends
As the economy recovers, consumer spending should consistently rise over the next couple of years. Consequently, Advance Auto Parts should see a rise in product sales. Furthermore, if Advance Auto Parts positions itself well, the rising costs of fuel and other items related to operating a car will drive people to it, because companies that offer cost cutting techniques on these expenses will be in high demand.
Risks Involved
Nonetheless, this company is a very risky place. There is a great deal of competition within the industry. Its main competitors, such as O'Reilly Automotive (ORLY), are bigger and offer a broader range of services. Also, in this business, companies have found it hard to make themselves known and set themselves apart from their competitors leading to little growth, as the companies compete for what little of the market is already unclaimed.
There is the threat that new players could enter the market but this is doubtful as there is little space left to operate in. A more likely threat is the chance of substitutes to its products emerging that are cheaper and work better to the products the company offers. This is a very serious consideration.
Key Statistics
Morningstar rates Advance Auto Parts as a three star stock and gives it a fair value of $95.00. Its revenue in fiscal year 2011 grew by $200 million and its net income rose by $49 million. These figures represented a slowdown of growth as in fiscal year 2010 revenue grew by $512 million and net income by $76 million. Having said this, much of this growth probably came from recovery from the recession. It spent $268 million on capital expenditures last year, had $829 million cash from operations, and had free cash flows of $561 million.
Conclusion
Buying this stock would not be a wise move. The share price is quite high right now with significant downward potential and very limited upward opportunity. Nevertheless, it has solid financials and pays a dividend, however insignificant that dividend may be. Consequently, if the share price drops to around $70-$75, it is worth considering as a buy. Anything above this, and the average investor would be risking too much for very little. It is a stock that is definitely worth further research.
The financial numbers are all from morningstar.com.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.